Analyst Proximity and Earnings Management

Abstract:     
This paper explores the hypothesis that the geographical proximity of analysts to the firms they cover influences the earnings management of those firms. Using a unique, hand-collected database of analyst locations, we show that firms with a higher level of local analyst coverage manage their earnings less. These firms are less likely to overinvest and make empire-building acquisition bids. They also have better operating performance and lower risks. The results indicate that geographical proximity facilitates analysts’ monitoring by reducing monitoring cost.

Number of Pages in PDF File: 48

Keywords: Analyst geography, Earnings management, Financial analyst, Corporate governance

JEL Classification: G34, M41, G24

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